March 11, 2014
Peso rises as Central Bank changes rules
The Central Bank yesterday reinstated a rule that restricts the amount of foreign currency holdings banks can hold in their coffers to a maximum 30 percent of the institution’s financial liability or its liquid equity, whichever is lower. At the same time, a 10 percent limit was set for the futures currency market.
Even though the measure sends more dollars to the Central Bank, economists agree that would not translate into a major impact on international reserves because most of the funds banks have in foreign currency are already accounted as part of the monetary authority’s reserves.
Indeed, despite the rule, reserves dropped US$57 million and closed at US$27.851 billion yesterday.
Although banks have until April 30 to adapt to the new resolution, the effect was evident in the exchange market yesterday as the official peso soared six cents and closed at 7.96 pesos, while the blue-chip swap dropped 43 cents to close at 12 pesos. No impact was seen on the illegal — or “blue” — dollar, which remained stable at 12.55 pesos with a low volume of transactions.
“Most of the money banks have is already included in the international reserves of the Central Bank so I don’t see an increase as a consequence of this measure,” Federico Muñoz, economist, told the Herald. “Even though the dollar drop is only temporary, it helps the Central Bank to show the rate will not increase every day.”
The Central Bank’s measure forces banks to sell dollars, leading to more foreign currency available on the market. The Central Bank used those funds to intervene in the Electronic Market (MEP) and buy US$386 million, while less than US$10 million were bought on the wholesale market.
Banks also got rid of funds in the futures market, also known as Rofex, where transactions of up to US$500 millions were carried out, a much higher amount than the usual US$200 million traded over the last few days. The increase in sales led to the the dollar exchange rate for future operations to drop 50 cents and close at 9.20 cents.
Economists and brokers agree banks currently have more funds than the ones authorized by the Central Bank.
“The dollar rate will start growing again when banks are done selling their funds. The measure won’t lead to more dollars being available on the market, it’s only a short-term thing,” Néstor Gutiérrez, a broker, told the Herald.
At the same time, economists assure no negative effects will be seen in the financial system since banks have more than enough funds in dollars and they have a good liquidity.
“I don’t see the measure being risky or having any negative effects. The dollar coverage of the financial system is more than sufficient,” Belén Olaiz, economist at Abeceb, told the Herald.
The measure had been implemented by the Central Bank until 2006, when it was cancelled. Now it will be reinstated with the same previous characteristics, which are also used by other Central Banks of several countries.
“Back then, the government implemented the measure due to an increasing trend of the dollar with the objective of having a wider demand,” Alejo Costa, analyst at Puente investment bank, told the Herald. “ Now they want to take pressure out of the peso devaluation. It’s a reasonable measure which is used in numerous other countries.”
A harsh month on reserves
After a steep devaluation of the peso, the most important since the financial crisis in 2002, the foreign currency reserves of the Central Bank restarted their drop in January and ended the month with a US$2.499 billion drop. January ended with a preliminary total of US$28.100 billion of international reserves with an average drop in US$ 192.6 a day, the worst monthly decrease since January 2006 when the federal government paid US$9.400 billion to the International Monetary Fund to cancel its debt.
The latest measure to push down the value of the dollar comes at a time when the Central Bank is increasing interest rates.
Long-term notes — of 273, 350 and 399-day — reached an average interest rate of 30 percent, while short-term notes reached an average 28 percent. Nevertheless, economists told the Herald these rates were likely not enough, suggesting the Central Bank needs to increase interest rates further if it hopes to have the desired effect on the economy.